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EU Carbon Border Adjustment Mechanism: A Fairer Price for Carbon Emissions

A Policy to Address Carbon Leakage

The European Union (EU) has implemented the Carbon Border Adjustment Mechanism (CBAM) to effectively address the issue of carbon leakage. CBAM is designed to prevent the outsourcing of carbon-intensive production processes to countries with less stringent environmental regulations, a phenomenon known as “carbon leakage.” By establishing a fair price for carbon emitted during production, CBAM aims to level the playing field for EU businesses and industries.

Key Features of CBAM

CBAM was officially launched on October 1, 2023, and is applicable to certain goods imported into the EU that have a significant carbon footprint. It covers sectors such as iron and steel, cement, electricity generation, and fertilizers. CBAM requires importers to purchase carbon certificates equivalent to the carbon emissions embedded in their products, effectively internalizing the cost of carbon emissions.

CBAM is also open to decarbonization efforts in third countries. The EU recognizes that cooperation and international coordination are crucial in addressing global climate challenges. It encourages third countries to implement their own carbon pricing mechanisms and offers financial assistance to support their transition towards a low-carbon economy.